Bull Spread
This is the most popular form of bullish trade. Traders should use this position if they believe the underlying asset price is likely to rise but don’t think it will rise very much and want to limit their loss. It’s a good position to maintain if the trader wants to be in the market but is uncertain of bullish expectations. It allows traders to participate, with limited risk and limited return, in the rise of a currency. Maximum profit is attained if the underlying security rises in price. Either calls or puts can be used, but the most common version is call-vs.-call. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date. Time value erosion is not too significant due to the balanced position.
Bear Spread
This is the most popular position amongst bearish traders. Use this position if you believe the market will fall, or is at least more likely to fall than to rise. It allows you to enter as a conservative trader when you are uncertain as to bearish forecast. The maximum profit occurs when the price of the underlying currency declines. Maximum loss occurs if the underlying currency rises in price. The strategy involves the purchase and instantaneous sale of options. Puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date. This strategy is designed to take advantage of a fall in the price of a currency, usually executed by buying a combination of calls and puts on the same currency at different strike prices in order to profit as the currency’s price falls. Time value erosion is not too significant due to the balanced position.
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